China's tech supply chain reels as infections soar, demand sours

China's tech supply chain is heading into the new year facing the twin challenges of slumping demand and staffing chaos caused by Beijing's abrupt U-turn on COVID controls.

In a sign of the gloomy outlook for consumer electronics, Apple has notified several suppliers to build fewer components for AirPods, the Apple Watch and MacBooks for the first quarter, citing weakening demand, according to Nikkei Asia's supply chain checks with several component suppliers.

"Apple has alerted us to lower orders for almost all product lines actually since the quarter ending December, partly because the demand is not that strong," a manager at an Apple supplier told Nikkei Asia. "The supply chain in China is still trying to cope with the latest abrupt policy turns, which brought a shortage of laborers because of the sharp COVID surges."

That policy change came in early December when China started to dismantle the world's most stringent COVID regime, which included mass testing and quarantines, to kick-start the flagging economy.

Tech manufacturers initially welcomed the turnaround after years of fighting to maintain operations under the strict COVID measures. But now they face the challenge of embracing a new normal of rising infections and looser controls.

"It's very chaotic," an executive at an electronic component maker that supplies Samsung, Apple and several Chinese smartphone makers told Nikkei Asia. "The new wave of COVID surges spread super fast, and most companies found it already makes no sense to quarantine their employees."

An employee at smartphone maker Honor described how workers now are largely resigned to catching the virus.

"The typical greeting now is: 'Have you already tested positive?'" they said. "It has become so natural now. If it's inevitable, most of us would rather get it earlier than later. Otherwise, it might disrupt our work next [this] year."

Local governments have helped spur the change. Provinces including Zhejiang, Chongqing and Anhui have announced that workers, including medical staff, who are asymptomatic or have only mild symptoms can go back to work with "due protection."

An official from Jiangsu province who previously oversaw manufacturers' COVID prevention measures told Nikkei Asia that the local government is no longer intervening in factories' epidemic control measures and almost all factories are asking workers with mild symptoms to come back to work.

Some worry that the abrupt exit from zero-COVID will have knock-on effects for China's economy.

"The rapid surge of infections in big cities might be only the beginning of a massive wave of COVID infections," Ting Lu, Nomura's chief China economist, warned in a recent note. "We expect major activity indices to remain weak or even to drop further in December."

Alicia Garcia Herrero, chief economist for Asia Pacific at Natixis, predicted a "noticeable" impact on manufacturing from the opening up. "However, it might not last too long if most major cities manage to peak by the end of Chinese New Year," she added. "In a nutshell, I believe a lack of external demand will be an even more important factor for China's manufacturing sector in 2023."

But others, like the Honor employee, are taking a more optimistic view: It is better to get over the worst of the infections now, while demand is slow anyway.

"More than half of our team has tested positive, and of course, we face disruptions in output," the manager of a print circuit board supplier in Jiangsu province that serves Apple and Intel told Nikkei. "But demand happened to be quite lackluster, so we just asked staff to take some leave."

Ding Yi, the owner of Wuxi Huansheng Precision Alloy Materials, described a similar situation. Production at his facility was interrupted in mid-December after most workers were infected, he said, but has gradually resumed by the end of the month.

"There is no big impact on the overall order fulfillment because orders decrease near the end of the year. That occurs all the time, so I am not that worried," he said.

For now, tech manufacturers are reluctant to cut back on staffing despite the gloomy demand outlook, for fear of repeating the headaches they experienced this year.

Foxconn's complex in Zhengzhou, the world's biggest iPhone-making site, suffered a labor shortage following a COVID outbreak in late October. Now it is offering bonuses of up to 14,000 yuan ($2,013) and asking employees to refer more recruits.

Other manufacturers in the tech supply chain, including Jabil in Chengdu, Pagatron in Shanghai and LY iTech in Shenzhen, also raised wages and bonuses for workers earlier this month after a large number of workers quit amid COVID outbreaks or left early for the Chinese New Year holiday, which starts on Jan. 20.

There is also optimism that the new year will bring change for the better.

"Most of us hope the surge of COVID waves will peak around February, and could gradually return to normal starting in March," a manager with SMIC, China's top chipmaker, told Nikkei Asia. "We experienced a very dark time back at the start of December, when almost half of our team and suppliers suddenly got COVID and there was maybe less than 50% of people still coming into the plant ... but now people are gradually getting used to the infection, and things are gradually improving."

Jonah Cheng, chief investment officer of private equity firm J&J Investment, is likewise optimistic.

"The electronics supply chain is still at the stage of digesting excessive inventories rather than starting to churn out massive components, but the bottom of the downturn will hopefully come in the first quarter of 2023," Cheng said.

"It's actually a good sign that China is heading to reopen its doors," he added. "There must be a lot of disruption in the short term, but in the coming quarters, [the reopening] could be good to stimulate the economy and could pave ways for a recovery."

Source: Nikkei Asia